Saudi 'will become 7th largest emerging capital market'

Dubai, July 24, 2014

Emerging capital markets will double their global index share by 2030, with Saudi Arabia expected to emerge as the seventh largest emerging capital market by 2030, says a report.

Saudi Arabia will account for the second largest share of emerging ECM deal fees ($5.5 billion) over the next 17 years, said Credit Suisse Research Institute’s “Emerging Capital Markets: The Road to 2030” report.

As a market with high retail ownership and a strong equity culture among high net worth individuals, secondary activity in equities should also prove to be a significant source of revenue, with average daily traded value expected to grow from $1.8 billion currently to $16.4 billion by 2030, it said.

The high forecast growth rate observed for Saudi Arabia would be consistent with a potential liberalisation of the country’s markets, should the Saudi Capital Markets Authority proceed with a reform package opening its bourse to direct foreign participation, thus creating significant additional external demand for Saudi assets, it said.

Driven by accelerating growth in capital raising activities over the next one-and-a-half decades, emerging nation capital markets are expected to capture a more proportionate share of the global capital market universe relative to their economies, closing the gap with their developed peers,

It also says that despite rapid growth in capital-raising over the past two decades, emerging country capital markets remain underdeveloped relative to the size of their economies. However, this will change in coming years.

While emerging market economies currently account for a 39 per cent share of global output, or 51 per cent based on purchasing power parity, they only represent 22 per cent of global equity market capitalization and 14 per cent of the global corporate and sovereign bond markets.

However, by 2030, their share of global equity market capitalization will increase to 39 per cent and, the corporate bonds and sovereign bonds share is expected to grow to 36 per cent and 27 per cent, respectively.

“The disparity between developed and emerging nations in the global capital market universe will close by 2030. This should be driven by a disproportionately large contribution from emerging market equity and corporate bond supply and demand driven by growth in domestic mutual, pension and insurance funds, given the relatively high savings ratios prevalent among emerging economies. Moreover, the growing ability of Emerging Market corporates to access local currency capital markets shields them from the risk of exposure to unforeseen exchange-rate volatility,” says Stefano Natella, global head of equity research, Investment Banking, at Credit Suisse in New York.

Credit Suisse forecasts that the fastest 17-year nominal US dollar compound annual growth rate in market value of any asset class will be Emerging Market equities and corporate bonds at 13 per cent, followed by Emerging Market sovereign bonds at 8 per cent, doubling the growth pace of their developed peers. Credit Suisse is forecasting growth in developed market equities, corporate and sovereign bonds to slow down at a pace of 7 per cent, 5 per cent and 3 per cent, respectively.

Consequently, the market value for emerging equities, corporate and sovereign bonds increases by $98 trillion, $47 trillion and $17 trillion, respectively, in nominal dollar terms between 2014 and 2030E, versus gains of $125 trillion, $52 trillion and $24 trillion, respectively, for these asset classes in the developed world.

“In this study, we extrapolate established historical patterns of growth in emerging and developed capital markets to assist in projecting their absolute and relative dimension and composition of market value by the year 2030. We find a strong relationship between the historical expansion of developed nation aggregate equity and corporate bond market value relative to GDP and gains in economic productivity.

Thus, we used long-term projections of per capita GDP to make forecasts for both emerging and developed market equity and fixed income issuance over the 17 years to 2030,” explains Alexander Redman, global emerging markets equity strategist, Investment Banking at Credit Suisse in London.

China to overtake the UK, Japan in 2030

While the US will remain the largest equity market in 2030 with a capitalisation of $98 trillion and a weight of 35 per cent, China will overtake both the UK and Japan to become the second largest market with a $54 trillion capitalisation and a weight of 19 per cent.

Cumulatively China has accounted for 40 per cent ($639 billion) of the total emerging world equity capital markets deal value (initial public offerings and secondary public offerings) since 2000. Over the next 17 years, China’s share will increase to 60 per cent or $3.6 trillion, representing a 5.5 fold nominal increase.

The forecast is based on the assumption that China’s capital account liberalizes over the next 17 years, giving foreign investors access to the A-share market.

Similarly, Credit Suisse also forecasts China's dominance of corporate bond market deal value in Emerging Markets over the last 14 years (a 37 per cent share or $1.6 trillion of the total) will persist, eventually taking a 53 per cent share (or $18.4 trillion) of total Emerging Market primary activity by 2030.

China will also represent the largest growth in corporate bond market value by 2030. Total issuance originating from China is projected to increase by nearly tenfold from $3 trillion in 2014 to $32 trillion by 2030, consistent with large-scale disintermediation by Chinese banks of state-owned enterprise and local government assets.

Underwriting fees

Credit Suisse also forecasts emerging countries not only will generate more underwriting fees, but will also capture a bigger share of the pie over the next 17 years.

According to the report, total capital markets underwriting fees globally for the period from 2014 to 2030 will reach $638 billion in nominal terms, compared to the $ 307 billion in fees earned in the period 2000 to 2014. Of the fee pool, 40 per cent or $256 billion is expected to be generated from Emerging Markets, versus a far smaller share of 16 per cent (or $49 billion) since 2000.

The division of fees between equity and debt capital markets until 2030 will also be much more balanced (49 per cent / 51 per cent, respectively), in comparison to a 67-33 per cent split as recorded from 2000 to 2013.

The wallet share of equity and debt capital market fees captured by Emerging Market local brokers will also rise from 45 per cent ($22 billion) from 2000 to 2013 to 58 per cent ($149 billion) between 2014 and 2030E.

Other key conclusions of study include:

• The Brazil, Russia, India, China and South Africa (BRICS) increase their share of the global equities universe to 26 per cent by the end of 2030, up from 11 per cent in 2014 and 2 per cent in 1996. Within Emerging Markets, BRICs will represent 66 per cent of equity market capitalisation by 2030, up from 52 per cent in 2014 and 21 per cent in 1996.

• Saudi Arabia, Indonesia and Turkey will undergo a meaningful change in their relative size rankings within Emerging Markets—Saudi Arabia rising to the sixth largest market from 10th, Indonesia rising to seventh largest from 12th, and Turkey rising to 10th largest from 17th.

• Countries with the swiftest equity capitalisation dollar CAGR between 2014 and 2030E are Turkey (17 per cent), China (16 per cent) and Indonesia (15 per cent)—these growth rates include both the impact of dollar price returns and that of net issuance and inclusions.

• An almost doubling of the global sovereign bond market value by 2030 to $84 trillion from $43 trillion in 2014 of which 42 per cent of the gain is attributable to Emerging Markets.

• The total cumulative secondary equity revenue opportunity is estimated to be $392 billion in emerging markets and $827 billion in the developed markets between 2014 and 2030. - TradeArabia News Service